Pricing is an important part of establishing successful products in marketplaces. In an existing marketplace, the price has already been established. A new entrant to the market needs to understand how products are priced and to use these prices as guidelines in setting his price: Too High and no one will buy his product; too low and no one will think the product is serious.

In new markets, it's even harder. There are no existing products to use as guides to pricing. Instead, vendors must do some tough homework, looking at what customers use now to get the job done and how much that set of goods and services (in our world, hardware, software, and internal IT resources or external consulting) costs. 

Most vendors insist NOTHING competes with their new idea.  If that's really true, except for a few truly breakthrough products (which may take decades to establish), there's a real question of whether anyone will actually want the product at all. Very few new products are absolutely new.  Most are evolutions, based on refining what we already need and do.

Let me offer some examples:

--Word processing may have ultimately been revolutionary in that in combination with personal computer technology it allowed us to change the organization of offices. Before word processing we did typing. Actually, for the first 20 years of word processing, specially trained employees called word processing operators (remember them?) did automated typing. Now word processing is something on everyone's desktop (and home office, laptop, and personal digital assistant) and secretaries (if you have one) are mainly for performing delegated tasks, making travel reservations and managing schedules.

--Desktop publishing looked to some like a brand-new technology and it depended on the coincidental and nearly simultaneous arrival in the marketplace of powerful personal computers, laser printers, and desktop publishing software. However, it simply offered a new way of doing an existing task -- creating camera-ready copy. Companies already had (big) budgets for printing and simply transferred a portion of that budget as desktop publishing offered cost savings plus speed and control. Remember how much of it quickly disappeared into PC word processing as these packages became more sophisticated and hungry for additional features?

--PDA's provide personal information wherever you are but I've never forgotten Stewart Alsop (in a public debate we were engaged in) besting me by pointing out that a 59-cent notebook and a #2 pencil was an alternative technology and that many would be happy to continue using it. (Of course, now that your PDA can be wirelessly connected to automatically update information and alerts, these devices may prove more valuable.)

There are two very different points of view about pricing.

(1) Vendors want (and need) to price products in a way to cover their costs, allow them to spend sufficient marketing dollars to establish high market share, and pay them a profit.

(2) Customers want products to be priced so that there is no question that their value to the organization exceeds their cost in a short period of time. (That is, they have a short payback period, preferably one that is no longer than 12-18 months.)

Both are right -- and wrong.

Vendors need to remember that while it's okay to charge a premium price for a breakthrough technology of obvious (and provable) value, it will limit the number of available customers in every cycle. It will also invite competitors to come in and establish their own markets under your generous pricing umbrella.

Customers need to remember that Vendors MUST cover their costs and make a profit if they are to succeed -- and no customer wants to buy products or services from a vendor who fails. All of us who purchased DSL Services, generally through other providers -- from the failed company Northpoint, would have gladly paid another $10 or $20 per month per line to avoid the interruption of service debacle we had to contend with this spring.

Part of the problem is that vendors approach pricing as a competitive issue and often try to disguise the real price of their products. We offer as a fine example of this practice (but scarcely the only one, simply the most recent one to attract our notice) Oracle's recent 9i database announcement. Oracle's CEO Larry Ellison talked about how the new product was "half the price of IBM's DB2." Prices of $40,000 per cpu for the Enterprise Edition and $15,000 per cpu for the Standard Edition were quoted. Impressive system differentials were cited. Also, Oracle announced a change from prices based on processor power (which might have penalized some customers running on larger processors) to a more normal per cpu pricing schedule.

The analyst/press grapevine heated up since many of us were fairly certain that Oracle couldn't really cut its prices in half and deliver its revenue numbers, especially in a tough year like this one. As the truth surfaced, it probably came as no surprise to any experienced observer or customer that by the time you add in the options most Enterprise customers would require, the prices had returned to their usual range.

This isn't at all unusual. Customers and analysts have learned to look at vendor pricing with a jaded eye, looking for base pricing versus options, required services or upgrades, or other clever ways to show a low price tag with a higher "real" price. It just makes it harder to get to the real "apples to apples" price comparisons that analysts and customers want and need to make -- and which vendors would often prefer to avoid. Just how silly this is can easily be shown. Software and hardware are only a small part of the cost of a sophisticated IT implementation. Design, implementation, migration costs, integration with existing applications and data, customization, training, and ongoing support will far outweigh the cost of hardware and software and should be a more important part of the user organization's considerations.

We wish vendors could understand that customers who are spending hundreds of thousands of dollars for a new piece of software are certainly smart enough to see through price tag games and get to the "real" price and that little or nothing is gained by trying for a bait and switch low price tag except annoying both the customers and their advisers in the analyst community.

We doubt, however, that such practices will stop any time in the foreseeable future -- or that other vendor practices, such as quoting obscure studies on market share or performance which are true (but only in some meaningless way) will also continue. So sharpen your pencil and your eyesight and read carefully. The budget you save will be your own.

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